Good morning. My name is Holly and I'll be your conference operator today. At this time, we'd like to welcome everyone to the Brandywine Realty Trust Second Quarter Earnings Conference Call. [Operator Instructions]. I'd now like to turn today's call over to Jerry Sweeney, President and CEO. Mr. Sweeney, I hand the floor to you.

Thank you very much, Holly and a good summer Friday morning to everyone as well and thank you for participating in our second quarter 2017 earnings call. On the call with me today are Tom Wirth, our Executive Vice President and Chief Financial Officer; George Johnstone; Executive VP of Operations; and Dan Palazzo, our Vice President and Chief Accounting Officer. Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release, as well as our most recent annual and quarterly reports that we filed with the SEC. So to start the presentations, we normally do a kickoff with a summary of our key business plan performance metrics, then turn it over to George for an operations and marketing update and then over to Tom to review our financial results. We're very pleased with the continued execution of our 2017 business plan. As noted in the press release and our supplemental package, we're 98% finished on the operating component of our business plan. And as such, we have refined our ranges to reflect this accelerated progress. Key headlines for the quarter. Our $0.34 per share second quarter core FFO was in line with consensus before factoring in the $0.02 charge for the preferred share redemption that we outlined last quarter. We posted a 10.1% same-store cash growth, so we're increasing our 2017 business range up to 7% to 8% cash same-store from the previous business plan of 6% to 8%. Cash mark-to-market for both renewals and new leases was also very…

Thank you, Jerry. We had another strong quarter of activity, bringing our 2017 business plan to its near completion. We've adjusted many of our targets, as Jerry mentioned and I'll touch on further in a moment. All of our markets continue to see good levels of leasing activity. During the second quarter, we generated 78 space inspections, totaling 550,000 square feet which represents 60% of available square footage. Turning to our three core markets. Our CBD Philadelphia portfolio remains 97% leased, with only 8% rollover for 2018. Leasing spreads remain healthy. For 2017, our average mark-to-market is 3.8% on a cash basis and 15.6% on a GAAP basis. Known large move-out activity in 2018 includes 100,000 square feet in the lower bank at Three Logan during the first quarter. We're currently negotiating with 3 prospects, ranging from 30,000 square feet to 55,000 square feet each. A known full floor move-out at Commerce Square in the third quarter of 2018 has already been leased to an expanding tenant. These activity levels have us remaining confident in the strength and vibrancy of the downtown market. Turning to the Pennsylvania suburbs. With the delivery of our build-to-suit property in King of Prussia, our non-present market properties are now 90% leased. The majority of our King of Prussia vacancy is isolated in a 150,000 square-foot building which is only 18% occupied. This property is currently being marketed for sale to a user. Shifting to the Crescent Markets and, in particular Radnor, the first of our known move-out to begin to occur during the quarter. A 50,000 square-foot tenant relocated to our build-to-suit property in King of Prussia. A 16,000 square-foot tenant relocated to FMC Tower and a 28,000 square-foot tenant downsized and relocated outside the portfolio. We have since relet that 28,000 square-foot space.…

Thank you, George. Our second quarter net income attributable to common shareholders totaled $4.1 million or $0.02 per diluted share and FFO totaled $57.4 million or $0.32 per diluted share. As outlined during our first quarter call, our second quarter results include a charge for the par redemption of our 6.9% perpetual preferred shares. The charge totaled $3.4 million or $0.02 per share. Excluding that charge, our earnings at FFO would have been $0.04 and $0.34 per share, respectively. Some observations regarding the second quarter results. Same-store NOI growth rates for the second quarter were 1.2% GAAP and 10.1% cash. Both exclude net termination fees and other income items. We've now had 25 consecutive quarters of increases to the GAAP metric and 21 for the cash metric. G&A totaled $6.3 million, slightly below our reforecast in the first quarter. FFO contribution from our unconsolidated joint ventures totaled $11.5 million, ahead of our reforecast, primarily due to a termination fee in our Austin portfolio and improved operating results. The space associated with the termination has already been leased to a tenant expansion. Interest expense totaled $20.3 million which is below our forecast and $1.1 million sequential decrease, primarily due to the payoff of the 2017 $300 million bond maturity, funded through a combination of cash in our line of credit. Other income and termination fees totaled $1.1 million, in line with our forecast. Third party fee income and expense totaled $7.1 million and $2.3 million, respectively, also in line with forecast. FMC Tower GAAP NOI totaled $2.6 million, below our $4 million estimate, due to some onetime deal related writeoff costs, timing of tenants taking occupancy and a stage availability of our residential units. On CAD, we had second quarter CAD of $42.9 million, representing a 66% payout ratio. That includes…

Tom, thank you. George, thank you as well. So to wrap up, our 2017 business plan is essentially in the books. We're focused now and staying ahead of the leasing curve, executing our early renewal program, wrapping up and stabilizing all of our development projects and really further establishing a platform for growing cash flow and growing net asset value. So with that, we'd be delighted to open up the floor for questions. We ask that in the interest of time, you limit yourself to one question and a follow-up. Holly?

[Operator Instructions]. Our first question will come from the line of Jamie Feldman, Bank of America Merrill Lynch.

Jerry, I guess, if you could just -- Jerry or Tom, just talk a little bit more about the delays that you mentioned that are pushing back guidance. And I guess, the bigger question on our mind is just, are you seeing a slowdown on leasing it all? Or this is purely just building out space that's causing kind of later revenue recognition. But if you could give a read-through into just kind of market conditions, that would be helpful.

Sure. I'll be happy to, Jamie. Yes, we'll be happy to, Jamie. We'll all kind of tag team it. Look, I think from our perspective, the most important number that we held firm on was our year-end leasing percentage. So we maintained that at the 95% to 96% range. So we thought that, that really reflected kind of the velocity that we're seeing through the portfolio. So when we look at our pipeline of deals being in that 1.9 million square feet, again, sequentially up from the last 2 quarters from 1.7 million, having about 300,000 square feet of leases out for signature, I think we feel very confident that we're going to meet those year-end targets with the continued momentum we built through. I think when we did take a look at the occupancy timing, frankly, we were probably a little too overoptimistic in terms of how we could get some tenants in the space, when previous tenants who were relocating or vacating weren't leaving until kind of May to July. So the leasing activity has been there, but the occupancy break did occur when we're looking at some tenants who we thought could get in, in December. So really very little of any revenue impact, but they did impact the occupancy statistic. So we expect them to occupy kind of in Q1. So from kind of a market velocity depth of deal pipeline, I think we really continue to see some good metrics there as we evaluate our re-leasing activity. We're clearly headed into -- we're in the middle of the kind of the summer gold room. So it's hard to get some leasing execution done. But I think generally, throughout all of our markets, we're seeing some pretty good activity. George, do you want to add any color to that?

Yes. Jamie, I'll just kind of pick up on that point. I mean, the length of time it's taking to close leases hasn't really changed. The pipeline at 1.9 million, while 300,000 of it is out for signature, we've got 1.3 million of it in the actual proposal stage and 300,000 in kind of the tour stage. So as expected, I think we're going to see maybe a little bit of a continued slowdown in tours, but the focus is really working the 1.3 million square feet portion of that pipeline to our in-possession of proposals to get them fully negotiated, executed and then start the tenant fit-out process which will inevitably spill over into the first quarter of '18.

Okay, that's helpful. And then I know you gave color on the Northrop lease in the third quarter of '18, but can you just remind us your largest known move-outs between now and the end of '18? And then also the largest leases or spaces you have left to backfill, if you could give us an update on the progress there.

Yes. So we talked -- we just talked about Northrop and then the 100,000 square feet at Three Logan. Next largest is a 2-floor tendency at Cira Centre that doesn't expire until the third quarter of '18. We're assuming a vacate of that space and currently have it on the market. Next stop is a 49,000 square-foot tenant in Dulles Corner, who will be renewing a little bit over half of their space and a 2-floor tenancy. So we're marketing to 1 floor we know we're going to give back. And then we've got 2 35,000 square-footers, one in Radnor, one in Metro D.C., who both have leases in hand right now to renew. And then, we've got one at Commerce Square which I alluded to in my commentary, a 30,000 square-foot giveback and we've already relet that to an expanding tenant. And everything else then kind of drops off below 30,000 square feet. The largest vacancies that we're dealing with are really from the most recent move-outs here in Radnor, 6 spaces in total, about 120,000 square feet, the largest of which is a 35,000 square-foot full floor. We've got 2 15,000 square feets that can be combined into a contiguous 30,000. And like I said, the pipeline in Radnor is encouraging at this stage of the game, given the fact the these tenants just recently moved out.

Our next question will come from the line of Manny Korchman with Citi.

Tom, if we could just spend another second on FMC. Just generally, I didn't get a complete read on whether or not leasing there was sort of slower than you expected or maybe you just expect a faster pace or somewhere in between? And then the second question is it just looks like the NOI there actually dipped 2Q versus 1Q. I'm just wondering what was going on there.

Sure, Manny. So there were a couple of things to your point. One is that we did have the low contribution NOI from the residential, again, staging of some of the spaces coming online was a little delayed and we think that is temporary. Also though in the quarter, we did have about an $800,000 charge to the property related to some deal costs based on some of the tenant movement. And therefore, some tenants that didn't make -- we had cost of about $800,000 which did hit the NOI line. We do not expect them next quarter. So that was a larger part of why we're below on that. On the office side, we do have a couple of tenants that George mentioned, one in particular that's in -- didn't take occupancy yet of space. They are in the process of building it out. So while it's leased, it's not coming online as quickly as we thought. Again, that's a temporary delay and we would expect that to resolve itself by the end of the year.

And then you guys mentioned a bunch of projects where you were in different stages of entitlement. Just if we have to sort of draw a roadmap of when things come online or when you get entitlements when you start building, could you sort of give us some color on that?

Sure. I think, Manny, I was alluding to some of our existing development projects. The training center that we're doing for Subaru on an 18-year lease, that's actually underway now and they're kind of highlighted on our development page, along with Broadmoor 6 and Gulph Road. In addition to that, we do continue the entitlement process on 405 Colorado which we expect to get the approvals perfected there by the end of the year. Our Broadmoor master plan that we're going through in Austin which we expect to get that again by the end of the year. We have some entitlement work underway on a project we call Metroplex in suburban Philadelphia. We expect to get that in the next couple of quarters. The objective there is to bring those projects to fully entitled, completed design development process and then really launch the -- or continue to launch the premarketing campaign. Any potential start in those 3 projects is completely conditioned upon our ability to find at least a 50% pre-leased anchor to bring those into construction commencement. On the Schuylkill Yards project in the city of Philadelphia, we did achieve approvals in June for phase 1 which consists of about 1.3 million net square feet. We will start the design development process on those now. That will take 12 to 15 months. And then during that period of time, we'll also be launching our marketing campaign to try and find a large anchor tenant to start one of those projects. So our business plan right now for '17 really only includes one $50 million construction commencement. We have a couple of opportunities, we think, that might get executed shortly, that would enable us to meet that business plan objective. So other than the Subaru transaction that I mentioned, Broadmoor underway, Gulph Road underway, the only' 17 start we're contemplating is that $50 million start some time in Q3.

Our next question will come from the line of Craig Mailman with KeyBanc.

Maybe a quick follow-up question on development piece. Just curious of the kind of the 1.3 million square feet in the proposal stage and I guess, the other, call it, 300,000 square feet that's not out for signature, under proposal. And how much of that is for either spec development or an anchor for -- or sorry, for build-to-suit or an anchor for like a spec start?

Yes, yes. Craig, actually, none of it. In our leasing pipeline, we really focus on our existing same-store portfolio. So the numbers that I alluded to and that George amplified, relate to our existing properties or existing inventory.

And any possibly you could give us a sense of kind of the tenant side? Just that you're out there looking for some like either Schuylkill Yards or a spec start in Austin or elsewhere?

Well, I think the -- yes. I mean, we're talking to tenants ranging really between 50,000 and about 200,000 square feet.

That's helpful. Then just on Three Logan, just curious, what type of mark-to-market we could expect in the backfill of 100,000?

Significant, because that space was leased to Verizon at the time that we acquired it a number of years ago. So we're looking at kind of double-digit, low double-digit, both cash and GAAP, mark-to-market there.

Our next question will come from the line of Richard Anderson with Mizuho Securities.

So when I look at this report, like you get a lot of outperformance when you look at cash numbers and maybe slight underperformance when you look at GAAP numbers, it's not exactly universally correct, but in that range. I know you reiterated your CAD payout range for 2017, but would you argue that if you were to give an actual AFFO number that the pressure is upward at the AFFO line versus slightly downward at the FFO line?

It's a good question. I think, look, when we're looking at our balance-of-the-year projections, we think we're in a very good shape to control capital spend as a percentage of lease runs. I think one of the things that we're really happy with coming out the quarter, Rich, was that our capital spend was just north of 10% of rents which we think -- and that's for all leasing activity, new leases, renewal leases, revenue maintaining, revenue creating. I mean, we look at the whole bucket. So we're really trying to do everything we can to optimize the investment we make in each individual lease. But certainly, one of our key driving business plan goals is to really increase our cash flow. That was behind a lot of our asset sales. That is implicit in every part of our leasing strategy. It's a key component of our forward development pipeline thinking. So Tom weighed on the FFO side. But I think the -- from our perspective, in looking at what really is going to drive growth. It's really -- we want to drive the cash flow. And I know we do percentages versus arranged now on the CAD number. But Tom, what do you think?

Rich, on the CAD, I mean, we're seeing our capital costs go down, but we leave a wide range right now on that number as a result of it as a cash number. So there can be some volatility to when we get actual TI spend and actual cash going out the door. So we keep it wide until we see a reason to either bring it in a little bit. And then maybe as we get into the third quarter call with the fourth quarter, more visibility will probably change that range. But I would agree with Jerry, we're seeing good cash flow. And therefore, hopefully, as we narrow that range to the balance of the year, you'll see it improve. But it is a volatile number and that's why we don't really change that range too much during the year.

Got you. And then, I guess, somewhat related to that, this time last year or maybe, I guess, it was March of last year, you raised your dividend a little bit, $0.01 a quarter, haven't done that yet this year. Would you say that if not for some of these occupancy delays, let's call it, maybe you would have been more in consideration of a change to dividend policy at this point in the year? Are the 2 interrelated, I guess, is what I'm asking.

Rich, we think the two are unrelated. Again, we look at the tightening our range on the occupancy level. It's been a topic of much discussion in the last 24 hours. The reality is that's really just a little bit of a slide from existing leasing activity. So we really do believe that the underlying strength of the portfolio is very strong. So certainly, the board looks at all the elements that drive the business. And I would say that they are pretty happy with the level of leasing activity we've had, our occupancy statistics, certainly, when we take a look at our positive mark-to-market and our ability to really contain concession costs, they are very strong indicators of how we think the value proposition of the company will be for the next several years, whether there'll be as much visibility as we can. So the tightening of the occupancy range this quarter was not a factor at all in the board's thought process on the dividend. I think they continue to be very focused on how we can return value to the shareholders. And we'll see what -- how they evaluate the current cash flow picture as the year progresses.

Our next question will come from the line of Michael Lewis with SunTrust.

Jerry, I think you said you're moving your headquarters so that a tenant could potentially expand in the future. I may be misunderstanding. Does that mean if the tenant does expand, you'll have to move again? And are there any material costs related to the move?

Yes. Michael, the -- look, I think we're always driven by what tenants want to do. I mean, one of the things that occurred here at Radnor is we had a tenant that really wanted our space, I think and we got a very good cash mark-to-market and a very good GAAP mark-to-market, too, on the lease. So that kind of opened our eyes to relocating. We had a tenant in FMC, who had an ability to give back some space. They exercised that. So I think from our perspective, we're moving into their space. First and what we did here, we relocated to Radnor originally. And we're positioned to stay there for a number of years. Or if another tenant wants to expand, a new tenant wants to come in, we'll relocate. And certainly, we don't view there'd be any material capital cost related to that future relocation.

Okay. And my second question, you did a lot of renewal leasing. The renewal percentage was high. That's great. Maybe you could just explain to me why the cash rent spread was so much better than GAAP on the renewal.

Yes. I think that really related to the IBM lease renewal which I'll defer to George and Tom to walk you through that math.

Yes. I mean, IBM clearly was the driver on the cash. If we had -- if you pull IBM out of the statistics for renewal, the cash would have been about 1.5% and then that GAAP would have gone from 1.1% up to 18.1%. So -- and part of that was just the GAAP nuance of the FAS 141 adjustment from when we bought the assets. But we just had a tremendous pickup in cash on 585,000 square feet with IBM.

Our next question will come from the line of John Guinee with Stifel.

John Guinee here. A couple of questions. Drilling down at the tenant level in both D.C. and Austin, can you talk about just what appears to be continued migration or expansion of tech companies in Austin and why that's happening and where they want to locate with some markets? And then also in D.C., Washington, D.C., talk a little bit about what you think's happening within the defense contractor industry, for example, although everybody seems to say tenants want to be at heavily-amenitized Metro locations, is sure isn't helping the Rosslyn-Ballston corridor. While on the other hand, the non-Metro-served Dulles corridor seems to be doing pretty well.

Yes. John, it's George. In Austin, I mean, I think the tech companies are clearly appealed by the access to that labor market. And they're really expanding really throughout all three markets, the Northwest up at the domain. And that's what has us very intrigued on our development opportunities at Broadmoor downtown. And we're seeing it even in kind of the Southwest portfolio, where our DRA venture properties are. So some of that is continued growth of companies already in Austin and then we've seen a number of tech companies relocating from California to Austin. So -- and in D.C., look, we fortunately have reduced over the years the number of leases and the exposure to defense contractors. But as everyone knows, I mean, Northrop is one of the larger ones. I think given the fact that they're in Dulles today, I think they like that location. And Metro is going to be delivered to Dulles ultimately. So I think that being kind of the primary example that we're seeing, we've got the large lease that I talked about in my commentary. And then we've got a smaller 30,000 square-foot lease with them in Dulles Corner that they've got execution copies in front of them. So -- but you're right, I think they may be less attracted to amenitize. Sometimes, I think it's the disruption of a move that often keeps them in place.

Great. And then, Jerry, it is -- or at the end of July and you've got a development start for the third quarter and if you're actually going to break ground by the end of the third quarter, you've got to know which building you're going to start. You have to negotiate contracts with the general contractors, et cetera. Can you give us any more color as to which building you're starting?

We actually have a couple in the queue, one of which -- either one of which could hit. They are both in Austin. So that's what we're thinking at this point. And either one would be heavily pre-leased. And really, on Austin, add-on to George's good comments, I think Austin just has a very powerful dynamic going. And 160 people a day moved into Austin last year. You had 100 new companies locate there. And I think what we're seeing, John, is kind of interesting. I mean, we're really seeing that market transition from one that was really driven a lot by tech companies. And I think the comparative costs between a Texas and a California were certainly a key driver there. That's why you now have Apple as one of the largest employers in Austin, Texas. You have Facebook grow there dramatically. Google's taking a lot of space. I mean, a lot of it's a labor-pull attraction, but a lot of it's a cost advantage of locating into that marketplace versus some of the traditionally tech-driven California markets. But an interesting thing that occurred which I think speaks really well to Austin's long term growth potential, is Merck had embarked on a national search for where to relocate their life science business. And they selected Austin. You've had the opening of the Dell Medical School, along with the health campus. That will be a huge driver of medical technologies and some significant investments. So we're really encouraged, I think, from what we see within our existing tenant base in Austin. And even the prospects we talk to who we really still view Austin from a relative standpoint compared to some other Southwest cities, California, as possessing a lot of the right ingredients for a long term corporate home or a big regional operation.

Our next question will come from the line of Jed Reagan with Green Street Advisors.

Could you potentially -- just a follow-up on that last one, could you potentially start both of those Austin developments?

It's possible though, Jed. I think the timing is such that we really feel one is something that would be undertaken in '17. And the second one, just giving some of the issues being negotiated, particularly in terms of space requirements, things like that, is probably more tuned to be in '18.

It would either be fully pre-leased or partially pre-leased?

They would be heavily pre-leased.

Okay, great. In terms of the dispositions, I mean, I guess, how are the pricing? How's the pricing and the pacing of dispositions going this year relative to your expectations? And then maybe just in general, have you seen any noticeable exchanges in the capital markets this year in terms of investor demand or pricing level?

I think the disposition pace is going pretty much as we anticipated. We've -- it's kind of the tale of two cities. The -- yes, I think some of the really non-core assets that we're trying to fundamentally move out of the portfolio, I think there, Jed, we're seeing the bid list are a little bit smaller. We kind of know who the potential buyers might be almost before we go to market, being kind of pretty much benchmarked where you think the pricing levels will be. And there really has not been any change there. And the length of time to get the deals closed tends to be kind of a 90 to 120 days versus kind of a 60-day cycle because their equity raising and either CMBS or bank financing requirements. So that's very much in line with what we anticipated. When we're looking at some of these assets, where we think there's good opportunity to harvest some great value because of the leasing status or the quality of the property or where it's located and we've put some of these properties in the market for kind of a price discovery, I think we're pretty pleased with the depth of the demand. The pricing levels are holding very firm. In fact, we've created some very nice auction processes on some of our higher-quality offerings. The deal terms are tight. So you're kind of a 30-30, 30 due diligence, 30-day close, sometimes even quicker. So I think we're pretty happy with kind of the range of what we've put on the market to sell. And certainly, the pricing levels we've gotten year-to-date on a lot of these asset sales have been well inside what we typically put our financial models at mid-8% cap rate. So as we're looking at the balance of the year, we're very confident meeting our $200 million disposition target well inside our targeted range. And depending upon how somebody's price discovery processes go on some of the other assets we have in the market, as I mentioned in my comments, we could actually exceed that benchmark on a net basis.

And sorry if I missed this, but if that did happen to the target, would that eventually lessen the term, the $250 million term loan median that you kind of outlined earlier?

It's possible. And I think Tom pointed that out in his comments which is, certainly, we want to take a look at all our combined sources and uses before we make a decision on the debt side. I mean, certainly, one of the things that occurred during the second quarter we're really happy about which was our ability to essentially take $400 million of fixed encumbrances between a $300 million bond and a $100 preferred and essentially exit those payoffs by utilizing cash and only increasing our debt takeout set by 50% of the $400 million or $200 million from our line outstanding. So we think that's a very effective tool that we can use through generating these sales efforts to kind of layer into our debt management plan.

Sure. That makes sense. Maybe just last one for me. Maybe one for George, I'm not sure, but can you give a sense of what kind of rent growth, if any, you're seeing around your markets at this point? Or have you seen any changes in the concession environment this year?

Yes. I mean, concessions have remained relatively unchanged. But when we kind of look at cash mark-to-market, I've given the 3.8% in my commentary in downtown Philadelphia, Pennsylvania suburbs running about 5.2% and we're still about a negative 3% cash in D.C. And then shifting over to the GAAP side, 15.6% in the city, 17.4% out in the suburbs and 7.4% positive GAAP rent growth down in D.C. based on length of lease and the rent bumps that we're getting typically between 2 and 3 quarters and 3%.

So as far as your asking rent, you just kind of market asking rent growth? Are you seeing any upward pressure there?

Not at this time. I mean, things have remained relatively status quo on kind of asking rents and where we're effectively cutting the deals.

Our next question will come from the line of Mitch Germain with JMP Securities.

So just trying to understand the occupancy trend in suburbs, I think, George, you referenced some more move-outs will be experienced next quarter. So is it really kind of next quarter winds up being the bottom and then it kind of trends higher 4Q into 1Q next year?

Yes. Exactly, Mitch. I mean, the next one is that 49,000 square-foot tenancy at Radnor Corporate Center that had a July move-out. So -- and then based on the pre-lease that we have in place on some of these spaces, Q3 for Radnor really does become the bottom end. And then it starts to pick up incrementally, then a little bit Q4 and then spilling into 1Q of '18. And then we've got kind of the staged takedown of some of those larger spaces occurring through 2018. So...

Understood. And then, Jerry, I apologize if you already answered. I know you mentioned some value-add acquisitions that were being targeted 1031. Is there a specific market that you're focusing it on right now?

Mitch, there is. I think we're focused really kind of on the -- call it the greater Philadelphia market from a value-add standpoint right now.

At this time, I'd like to turn the call over to Jerry Sweeney for closing comments.

Great. Thanks, everyone, for joining for the call. We look forward to updating you on our business plan progression, 2018 guidance on our Q3 call. In the meantime, have a wonderful safe and enjoyable summer. Thank you very much.

Thank you for participating on today's Brandywine Realty Trust second quarter earnings conference call. We do appreciate your participation and ask that you disconnect. Thank you.